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November 5, 1998

MARGARET NEWTON, et al., Plaintiffs,

The opinion of the court was delivered by: KATZ


 AND NOW, this 5th day of November, 1998, after a bench trial, the court makes the following findings of fact and conclusions of law:

1. This is an action brought by four low-income homeowners against a lender with whom they each entered into high-priced mortgage loans to finance home improvements. They allege a "loan packing" scheme in which they ultimately borrowed amounts in excess of what they needed, wanted, or could afford; were charged substantial fees that were illegal and improper; and failed to receive various disclosures required by federal law. The complaint alleges violations of the Home Ownership and Equity Protection Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Pennsylvania Home Improvement Finance Act, and the Pennsylvania Uniform Trade Practices and Consumer Protection Law. Plaintiffs seek rescission of the loans and statutory damages pursuant to these several federal and state consumer protection laws.
2. Plaintiff Margaret Newton is a 76-year old homeowner who purchased her home in 1968. She purchased her home with a mortgage she obtained through a real estate office where she made payments on a weekly basis. That mortgage was paid off at the time she entered into the subject credit transaction with United. Stipulation P 28. Mrs. Newton has suffered four strokes; she is unable to walk without assistance and has difficulty seeing, speaking, and concentrating. She is virtually homebound, and she is cared for on a daily basis by her daughter Claudette, who lives with her, along with Claudette's two children. M. Newton Statement; C. Newton Statement.
3. Sometime in 1995, Mrs. Newton decided to have her property improved with exterior siding and insulation. After being rejected for credit by several home improvement dealers and lenders during 1995 and 1996, she was solicited in late July 1996 by a home improvement salesman named Scott Kosit, who represented to her that he could do the job and get her the necessary financing. Kosit was acting on behalf of Affordable Vinyl Products, a home improvement dealer located in Mount Holly, New Jersey. Stipulation P 29.
4. On July 25, 1996, Affordable and Mrs. Newton entered into a home improvement contract providing for the installation of siding and insulation by Affordable for a price of $ 9,990. Stipulation P 30.
5. On or about July 24, 1996, Affordable contacted the Mt. Laurel, NJ branch of United about the possibility of extending credit to Mrs. Newton in order to fund the contract price of $ 9,990. During a four or five month period in 1996, the Mt. Laurel branch closed about five loans that began as telephone calls from Affordable to United. Stipulation P 31.
6. The note and mortgage Mrs. Newton ultimately signed was for $ 15,500. At no time prior to the closing did United disclose to her in writing that this was the precise amount of the mortgage she was incurring. Included in this $ 15,500 figure were the following: $ 10,000 paid into a home improvement escrow fund maintained by the title insurance company; $ 1,581.65 required by United to be paid to the City of Philadelphia for delinquent real estate taxes and water bills, $ 525.67 in cash to Mrs. Newton, and $ 3,050 in points, fees, and settlement charges. Stipulation PP 43, 44.
7. On Mrs. Newton's $ 15,500 loan, her monthly payment was $ 241.33. She paid a total of $ 2,951.03, but she fell behind within the first year of the loan. Stipulation P 48.
8. Plaintiffs Jasper and Catherine Sutton, who are both retired, obtained title to their home in 1982, after paying $ 100 per month for five years, on a lease-purchase basis. They also purchased a North Philadelphia row house on Ingersoll Street in 1991 for cash. Mr. and Mrs. Sutton both completed only an eighth-grade education. Stipulation P 50. Prior to their loan from United, the Suttons had obtained several mortgage-secured consumer loans from Mid-Penn Consumer Discount Company. Stipulation P 51.
9. In August 1996, the Suttons received a flyer offering home improvement work. They filled out the flyer indicating a desire to have doors and windows installed, sent it in, and as a result were visited by a salesman for Inner-City Community Home Improvements, Inc., a home improvement dealer. Stipulation P 52. On September 4, 1996 the Suttons signed a written contract to have six new windows and two new doors installed in their home by Inner-City for $ 7,488. Stipulation P 53.
10. The Suttons ultimately obtained a loan from United for $ 17,000. After their loan closing, the Suttons instructed their home improvement dealer not to proceed with the work. The funds borrowed from United were never paid out of the home improvement escrow account. Stipulation P 75. The Suttons made no scheduled payments on the loan. They sent a money order to United in the amount of $ 111.97, which was the amount of the cash proceeds they had received. Stipulation P 76. On December 27, 1996, the Suttons made a written request to United to rescind their loan. Stipulation P 77. United did not accept the Suttons' payment or their rescission request, and has not satisfied the mortgage it holds on the Suttons' home. Stipulation P 78. In July 1997, United commenced an action in mortgage foreclosure against the Suttons in the Philadelphia Court of Common Pleas. Stipulation P 79.
11. Plaintiff Judith Fowler purchased her home in 1990 together with her mother, for cash. Ms. Fowler dropped out of school after the eleventh grade. Stipulation P 80.
12. In the summer of 1996 Ms. Fowler decided that she needed work done on her home, including new doors, and contacted T&P Construction Contractors after seeing a T&P newspaper advertisement. A representative of T&P gave Ms. Fowler a contract proposal of $ 4,000 for four new doors and told her he would attempt to arrange a loan for her. On August 13, 1996 Ms. Fowler signed a written contract proposal for home improvement with T&P. Stipulation P 81. It was understood between T&P and Ms. Fowler that no work would be done by T&P until she obtained financing. Stipulation P 82.
13. T&P contacted a lender, Mego Mortgage Company, which did not agree to extend credit to Ms. Fowler. After its unsuccessful contact with Mego, T&P contacted United about the possibility of extending credit to Ms. Fowler in order to fund the contract price of $ 4,000. Stipulation P 83. T&P completed portions of a form entitled "Borrower Information Screen" and then faxed it to Michael Borso, a loan officer at United. Stipulation P 84.
14. Ms. Fowler's total loan from United was ultimately for $ 11,600. After Ms. Fowler's closing, only $ 2,000 was put into a home improvement escrow account, although the statement she signed at the closing stated that $ 4,000 would be put in the account. Stipulation P 96. The additional amounts were used to satisfy other encumbrances on her home revealed during the title search, but which were not discussed with her. The $ 2,000 was never paid out of the home improvement escrow account. Stipulation P 99. T&P did not in fact perform any work, because there were insufficient funds in the account to pay the $ 4,000 contract price. Stipulation P 100.
15. On May 17, 1997 Ms. Fowler made a written request to United to rescind her loan. Along with her written rescission request, Ms. Fowler returned the check for $ 49.93 that she had received from the closing agent, representing her cash loan proceeds. Ms. Fowler has not returned any other loan proceeds. Stipulation P 101, 102. United has not satisfied the mortgage it holds on Ms. Fowler's home. Ms. Fowler made a total of two payments to United, totaling $ 409.31. Stipulation P 103, 104.
16. Plaintiff Frauncine Lora Myers is a 54-year old homeowner who purchased her home in March 1982 for cash, using insurance proceeds she received following her husband's death. Ms. Myers dropped out of school in the eleventh grade. Stipulation P 105. On three occasions between the time she bought her home and the 1995 loan transaction involving United, Ms. Myers financed home improvements through mortgage-secured extensions of credit. Stipulation P 106.
17. In February 1995, Ms. Myers responded to a solicitation by All State Discount Builders and requested an estimate for a remodeling of her basement. Stipulation P 107. On February 27, 1995 Ms. Myers signed a written contract proposal for home improvements with All State. The contract price was $ 14,995. The All State salesman told Ms. Myers that All State would attempt to obtain the financing for the work. It was understood between All State and Ms. Myers that no work would begin until she obtained financing. Stipulation PP107, 108, 109.
18. The total amount Ms. Myers ended up borrowing from United was $ 40,300. Ms. Myers stopped making her loan payments to United after she and her son (who co-signed for the loan) lost their jobs over a year after the loan closed. She had paid United a total of $ 11,128.24. Stipulation P 122. In February 1997, United instituted a foreclosure action against Ms. Myers in the Philadelphia Court of Common Pleas. Stipulation P 123. On February 21, 1997, Ms. Myers sent United a written request to rescind her loan under the Truth in Lending Act. United has not accepted Ms. Myers's rescission request and has not taken action to cancel or satisfy the mortgage it holds on her home. Stipulation PP 124, 125.
19. Mrs. Newton, Ms. Myers, Ms. Fowler, and Mrs. Sutton are literate. They did not read the loan documents and disclosures provided to them. Stipulation P 27.
20. In each of the four loans, the closing was conducted in the customer's home by Murray Levin, Esquire, an attorney retained by the title company, not United. In no case did Mr. Levin refuse to answer any of the borrowers' questions, and, in fact, it is his practice to answer any and all questions if asked. Stipulation P 9.
21. This court has jurisdiction over this matter. 28 U.S.C. §§ 1331, 1367.
22. Venue is proper in this district. 28 U.S.C. § 1391(b).
HOEPA Disclosure Notices
23. The Home Ownership and Equity Protection Act ("HOEPA") requires delivery of special disclosures of credit terms at least three business days prior to the loan closing. 15 U.S.C. § 1639(a)-(b); 12 C.F.R. § 226.32(c). *fn1" Plaintiffs Newton, Suttons, and Fowler claim that United violated this provision by not timely delivering the required notice. As the parties agree in the Stipulation, the Myers loan was consummated prior to the effective date of HOEPA, so that loan is not covered and Ms. Myers is not a party to this claim.
Findings of Fact
24. In each of the three plaintiffs' loan files there are HOEPA disclosure forms bearing their signature. Exs. N25, S63, S172, F65. All of the plaintiffs claim that they did not receive the notices before closing.
25. The date printed on the respective HOEPA disclosure notices was a computer-generated date that signifies when the notice was supposed to have been delivered to the customer. The printed date is not proof that the notice was in fact delivered or signed by the customer on that date. Trial Transcript (hereafter "Tr.") Day 4, pp. 68-71, 130; Day 5, pp. 12-13.
26. Mrs. Newton signed the HOEPA disclosure form, Ex. N25, which is dated July 29, 1996, on September 3, 1996 at the loan closing in her home. Stipulation P 42; Tr. Day 4, p. 144.
27. Based on the signatures (compare Ex. N25 to Ex. N2) and the testimony, it appears that this is the only one of about 30 documents that Mrs. Newton signed without her daughter Claudette's assistance. This may have occurred when Claudette left the room briefly. Tr. Day 1, pp. 72, 79.
28. Although United's loan officer James Huntington testified that he delivered the HOEPA form to Mrs. Newton's home on August 29, 1996 by placing it inside her door, Witness Statement of James Huntington, his testimony is not credible. He claims to have placed it in the Newton's unused side door, despite the fact he had previously entered the house through the main door. Tr. Day 4, p. 160. He also claims that he knocked first and no one answered. Tr. Day 4, p. 142. This detail is implausible given that Mrs. Newton is elderly and infirm and rarely leaves her home. Tr. Day 1, pp. 77-78. The main door has a mail slot. Ex. N93 (photograph). The unused door, on the other hand, is locked from the inside. Tr. Day 1, p. 75. Mr. Huntington claims that the form remained in the storm door for five calendar days, from August 29 until September 3, undisturbed and undiscovered, Tr. Day 4, pp. 163-164, despite the fact that the house was occupied by two adults and two children at a time of year when they would normally spend a portion of each day out of doors. See Claudette Newton testimony, Tr. Day 1, pp. 74-78. Mr. Huntington testified that the closing attorney, Mr. Levin, following his usual practice, inquired about the HOEPA form at closing, Tr. Day 4, pp. 143, 155, leading to its discovery in the door. In contrast, Mr. Levin testified that his practice was NOT to inquire about or review the HOEPA form, since United had assured him that the signing and delivery always took place three days before closing, and indeed, if it did not, the closing documents could not be produced by the computer. Tr. Day 2, pp. 11-13. Mr. Levin specifically denied any recollection of the events described by Mr. Huntington. Tr. Day 2, pp. 13-15. Claudette Newton, moreover, unequivocally denied that she "discovered" the HOEPA form on the closing date where Mr. Huntington claimed to have left it. Tr. Day 1, pp. 78-79. The most plausible inference from all the testimony is that Mr. Huntington presented the form to Mrs. Newton for the first time on September 3, 1996, the date of closing, and that she signed it during her daughter's momentary absence.
29. Mr. and Mrs. Sutton also first received and signed their HOEPA disclosure form at closing. The closing attorney's testimony establishes that the check marks in front of their signatures are his, despite his assertion that having United's customers sign the three-day advance disclosure at loan closings was not his usual practice. Tr. Day, pp. 17-20.
30. The United loan officer who was supposed to provide the Suttons and Ms. Fowler with their HOEPA advance disclosure, Michael Borso, had no recollection regarding the delivery of the notices to either household. Tr. Day 5, pp. 11, 15. Instead, he relies solely on the assertion that it was his general practice to properly deliver the forms. In contrast, both plaintiffs remember that there was no advance delivery of the HOEPA notice. Fowler Statement, p. 2; Sutton Statement, p. 2.
31. United Loan officer Borso's statement that he made it his uniform practice to deliver the HOEPA notices three days before closing is not credible. He admitted at trial that he structured a loan for plaintiff Judith Fowler that included payment of a broker fee to Robert Cimerol, who had no involvement whatsoever and provided no services in the Fowler transaction. Tr. Day 5, pp. 44-59. After the presence of the additional liens caused the Fowler loan to be underfunded, Borso claimed to have discovered his "mistake" and then rewrote the loan without the broker fee. He lied to his supervisor and the title agent, telling them that the broker fee was being "waived." Ex. F147; Tr. Day 5, pp. 58-59. He also told Ms. Fowler, his supervisor, and the title agency that the contractor would perform the $ 4,000 home improvements for $ 2,000, a patently false statement and one designed to prevent his losing a commission on a loan that was not going to achieve the customer's objective. Tr. Day 4, p. 81 (McHugh testimony). Given these statements and conduct, Mr. Borso's attestation of his adherence to regular practices and faithful delivery of required disclosures three days before loan closings is not credible.
32. While United routinely created HOEPA forms containing pre-printed dates purporting to be a date of delivery and acknowledgment by the borrower, United did not maintain procedures designed to ensure that the delivery would in fact take place. For example, when calling to make an appointment with the customer for a loan closing, the loan office would not try to make an appointment for delivery of the HOEPA disclosure. Tr. Day 5, p. 17. Similarly, in contrast to the system used to track delivery of another time-sensitive disclosure (the "good faith estimate" of settlement costs), United maintained no log or notations as a record of an actual delivery of a HOEPA disclosure. Tr. Day. 4, pp. 62-67. Also, in some instances, apparently the disclosure form is brought to the consumer, signed, and then taken away and retained by United. Tr. Day 4, pp. 72-73. Finally, the closing attorney, who received standardized, written instructions from United to verify at closings that the three-day advance disclosure had been delivered, routinely failed to follow these instructions because he had been told (incorrectly) by a United manager that he did not have to worry about verifying the HOEPA delivery because the company's computer system would not allow a closing to occur unless the delivery had taken place. Tr. Day 2, pp. 11-12.
33. Ms. Fowler and the Suttons sent written demand letters to United that requested a rescission of their loans with United. United did not accept these rescission demands and took no steps to implement the rescissions. In the case of the Suttons, United commenced a foreclosure case against them. Stipulation PP 77-79, 101-03.
34. What Mrs. Newton actually received in loan proceeds as a result of her loan transaction was $ 245.34 paid to the City of Philadelphia for delinquent water/sewer charges and $ 1,336.31 for real estate taxes, and $ 525.67 in cash, for a total of $ 2,107.32. Exs. N29, 30. The home improvements she received had zero value because the siding would have to be removed and discarded in order to install the insulation that was supposed to have been installed but was not. M. Newton Statement; Statement of Melvin Esh. She paid a total of $ 2,951.03 on the loan. Stipulation P 48.
35. What Ms. Fowler actually received in loan proceeds as a result of her loan transaction was $ 6,437.95 in payments on City liens ($ 88.58 for real estate taxes, $ 481.58 for water/sewer bills, $ 4,644.86 for bail liens, and a $ 250 fine), $ 600 paid on a prior mortgage, and $ 372.93 paid on a gas bill. She made payments to United totaling $ 409.31. Exs. 405-07; Stipulation PP 97-104.
36. What the Suttons actually received in loan proceeds as a result of their loan transaction was payment of $ 438.32 in real estate taxes, $ 171.29 in back water/sewer charges, $ 2,119.85 on a disputed City lien on another property they own, and $ 2,400 towards their obligation to Mid-Penn, for a total of $ 5,129.46. They did not make any payments on the loan. Sutton Statement; Exs. S45-46; Stipulation P 76.
Conclusions of Law
37. HOEPA added consumer protections to the federal Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et seq. The enactment of these additional protections was a Congressional determination that the type of disclosures required under TILA, and applicable to the mortgages in this case, were insufficient to ensure adequate notification to the consumer of the financial ramifications of high cost, nonpurchase money mortgages. See United Companies Lending Corp. v. Sargeant, 1998 U.S. Dist. LEXIS 14661, *30 (D. Mass. Sept. 11, 1998).
38. HOEPA requires delivery of special disclosures of credit terms at least three business days prior to the loan closing. 15 U.S.C. § 1639(a)-(b); 12 C.F.R. § 226.32(c).
39. Since its enactment in 1969, TILA has been enforced primarily by private civil actions. A consumer may sue for a fixed, statutory damage award when TILA is violated. 15 U.S.C. § 1640(a). The penalty, equal to twice the finance charge in the contract, was capped at $ 1,000 until 1995, when it was increased to $ 2,000 in the case of residential mortgage loans. The Truth in Lending Act Amendments of 1995, Pub. L. No. 104-29 § 6 (Sept. 30, 1995). In residential mortgage loans, the consumer is also entitled to rescind the loan for up to three years, in the event of enumerated "material" violations of TILA. 15 U.S.C. § 1635.
40. The rescission and damage remedies are cumulative. Since the failure to honor a valid rescission demand is itself a TILA violation giving rise to statutory damages, 15 U.S.C. § 1640(a)(3), a consumer who is entitled to rescission may also recover a statutory damage award for the creditor's failure to rescind voluntarily. See Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 903 (3d Cir. 1990).
41. HOEPA explicitly provided that violations of its special protection provisions would entitle consumers to rescind mortgage loans and to recover the TILA statutory penalties. 15 U.S.C. § 1639(j). In addition, the statutory damages provision was amended to increase the total award to the consumer in the case of HOEPA violations. Besides the standard $ 2,000 TILA penalty, the consumer may also recover an amount equal to the total finance charges and fees paid. 15 U.S.C. § 1640(a)(4).
42. TILA has always been understood to be a strict liability statute. The statutory damages are awarded in any case in which the creditor violates the specified provisions of TILA, regardless of whether the creditor's conduct was intentional, negligent, or inadvertent. See Porter v. Mid-Penn Consumer Discount Co., 961 F.2d 1066 (3d Cir. 1992); Smith v. Fidelity Consumer Discount Co., 898 F.2d 896, 903 (3d Cir. 1990); Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 249-50 (3d Cir. 1980); In re Brown, 106 B.R. 852 (Bankr. E.D. Pa. 1989). The only exception is specified in 15 U.S.C. § 1640(c) regarding clerical errors occurring despite the presence of procedures designed to prevent errors. This exception was neither pled nor proven by defendant in this action.
43. The HOEPA early disclosures were not furnished to the plaintiffs three business days prior to consummation of the mortgage transactions.
44. The amounts paid by the plaintiffs with HOEPA loans are: Mrs. Newton, $ 2,951.03, and Ms. Fowler, $ 409.31 (the Suttons did not pay anything). In each case the loan origination fees and other finance charges exceed the amounts paid. Therefore, the entire amount paid by each plaintiff may be allocated to finance charges, and the enhanced HOEPA penalty is equal to that amount.
45. As a result of United's violation of HOEPA, the Suttons, Ms. Fowler and Mrs. Newton are entitled to rescission of their loans, pursuant to 15 U.S.C. § 1635, and to awards of $ 2,000 each for the underlying violation of the three-day early notice provision of HOEPA, plus attorneys' fees. 15 U.S.C. § 1640(a). Mrs. Newton and Ms. Fowler are also entitled to separate, additional awards under 15 U.S.C. § 1640(a)(4) in the amount of $ 2,951.03 to Mrs. Newton and $ 409.31 to Ms. Fowler.
HOEPA Repayment Ability
46. In 1994, HOEPA amended TILA to forbid creditors from engaging in "a pattern or practice of extending credit . . . based on the consumers' collateral without regard to the consumers' repayment ability, including the consumers' current and expected income, current obligations and employment." 15 U.S.C. § 1639(h). Plaintiffs (again, Newton, Suttons, and Fowler, but not Myers) claim that United violated this provision by making loans to them that they did not have the ability to repay.
Findings of Fact
47. The parties agree that United had written underwriting guidelines and parameters which required analysis of the applicant's income, monthly debt payments, residual income, debt ratio, and loan to value ratio in deciding to make a loan. Stipulation P 15.
48. Each loan originated by United had to be approved by a separate underwriting department in Baton Rouge, Louisiana. Stipulation P 17. During the relevant time period, United's loan approval process was initiated by a branch loan officer (sometimes referred to as a "loan originator") completing and submitting to the underwriting department a form entitled "Request for Loan Approval." The Request for Loan Approval required information to be provided as to an applicant's gross monthly income, monthly payments on the loan being applied for, an applicant's debt to income ratio, and an applicant's residual income, as well as appraised value of the anticipated collateral and loan to value calculations. Credit reports, appraisals, income verifications, employment verifications, and a typewritten application were also supplied to the underwriting department with the Request for Loan Approval. Stipulation P 18.
49. During the time period July 1996 through December 1996, United's Plymouth Meeting/Allentown branch sent 298 Equal Credit Opportunity Act loan denial letters to applicants. Of the 298 denial letters, eight were based on an applicant's insufficient income; 56 were based on an applicant's insufficient credit, five were based on a combination of insufficient income and insufficient credit; one was based on a combination of insufficient income and collateral value; eight were based on a combination of insufficient credit and collateral value; 14 were based on insufficient value or type of collateral alone; four were based on a combination of insufficient credit and incomplete applications; 106 were due to incomplete applications; 75 were due to the fact that the applicant canceled; 11 were based on a lack of contact with the customer; five were based upon an assessment by United that the loan would not benefit the applicant because it would not lower the applicant's loan payments on his or her currently outstanding obligations; and five denials were made for other reasons. Stipulation P 19.
50. In the same time period, the Plymouth Meeting/Allentown branch originated 125 loans. Stipulation P 20.
51. In the time period July 1996 through December 1996, United's Mt. Laurel branch sent 422 Equal Credit Opportunity Act loan denial letters to applicants. Of the 411 denial letters, 22 were based on an applicant's insufficient income; 78 were based on an applicant's insufficient credit; eight were based on a combination of insufficient income and insufficient credit; five were based on a combination of insufficient income and collateral value; 15 were based on a combination of insufficient credit and collateral value; 69 were based on insufficient value or type of collateral alone; one was based on a combination of insufficient income and temporary or irregular employment; one was based on a combination of insufficient credit and incomplete application; one was based on a combination of insufficient collateral value and ...

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